That was a good article to keep on file to use on a slow day for financial news.

Somewhat like a stopped clock being correct twice a day, someday gold will boom and bust again, with all of the attendant stress of correctly timing both events. Some one will famously get both right while most will miss the peak and the trough to find that gold was not as good an investment as patiently holding equities through thick and thin.

Many would do better by learning about self-deceiving traits in behavioral finance instead of seeking better returns using precious metals.

Problem 1: Who cares about the Dow? It's not a good proxy of US stocks as a whole.

Problem 2: Who says inflation is coming? The Fed is raising rates in an attempt to manage this. People have been claiming inflation will be coming for a couple of years. It hasn't happened. (Not saying it can't or won't)

Problem 3: If you look at the price of gold, it tends to go up in fits and starts, but not do much for long periods of time. Admittedly that is part of the point, but people seem to equate gold with a safe return, when it is probably safe, but maybe without return.

Problem 4: If inflation is caused by tariffs rather than just being a function of monetary policy, golds ability to protect will be more limited. This isn't about the value of money changing as much as the cost of the products changing.

Problem 5: If it is a financial product fear mongered to older folks on cable news shows, my inclinations is to avoid the product.

There's always a case for gold. In fact, it should form the core of everyone's portfolio as a form of universal money -- just in case. 10% or so core holding in gold should be at the heart of any investor's assets.

There's always a case for gold. In fact, it should form the core of everyone's portfolio as a form of universal money -- just in case. 10% or so core holding in gold should be at the heart of any investor's assets.

Why not bitcoin? /sarcasm

If you torture the data long enough, it will confess to anything. ~Ronald Coase

10% or so core holding in gold should be at the heart of any investor's assets.

My advice: start with 5% and watch it drop to 3%. Repeat.

Don't get me wrong. I still own gold, but I've been disappointed since 1980. Over and over and over...

Gold is not an investment, it's a hobby. I wised up to this in the early 2000s when I changed my strategy to collecting the coins by date. If you want a commodity, buy cans of beans and store them under your bed. If you want money, invest in supermoney (also known as capital, ownership of companies, stock). If you don't understand the concept of supermoney, read the old book by "Adam Smith" called Supermoney.

"have more than thou showest, |
speak less than thou knowest" -- The Fool in King Lear

There's always a case for gold. In fact, it should form the core of everyone's portfolio as a form of universal money -- just in case. 10% or so core holding in gold should be at the heart of any investor's assets.

i dont believe there is ever a case for gold. i completely follow Buffetts logic on this.

Agreed.

Buffet says that suppose you bought all the gold metal that exists in the world, and you cast it into a cube. It would be about 20 meters on a side.

What could you do with it? You could look at it. Fondle it. And not much of anything else, because gold doesn't do anything besides just sit there. It won't earn anything while it just sits there. It won't pay any dividends.

Don't get me wrong. I still own gold, but I've been disappointed since 1980. Over and over and over...

If you buy gold in hopes of capital appreciation without limiting your buying to deep drawdowns, you are likely to be disappointed for a long time. Gold is not like equities where the “world’s worst market timer” still makes a decent CAGR. The worst gold market timer from 2011 is still underwater, and may well be for some time to come.

That’s just the nature of an asset class that doesn’t derive its positive expectation from a steady stream of income and therefore doesn’t trend upward as consistently as equities.

Which is not necessarily an argument against gold, but rather a caution that it is much more of a niche asset class than stocks. You either have to be willing to play the long game - which means potentially not holding gold at all for years at a time - or embrace its value as a hedge and a permanent part of the portfolio, in which case you don’t mind topping it off from 3% to 5%, just as you don’t mind paying an insurance premium.

Over that time period, a 55/35/10 stock/bond/gold portfolio outperformed a 60/40 portfolio by 55 basis points per year.

Exactly. Not only do modest allocations to gold boost portfolio performance in nominal times as you've said, they also offer disaster protection against the unthinkable.

Gold isn't some kind of religion or anything, it's just a tool. I don't get why people have such a problem with it. It's not like 10% is betting the farm on economic apocalypse. Gold could be a lifesaver at best, but even at its worst it has been a nice little stabilizer.

Problem 4: If inflation is caused by tariffs rather than just being a function of monetary policy, golds ability to protect will be more limited. This isn't about the value of money changing as much as the cost of the products changing.

There is no reason to believe that tariffs cause overall inflation. If the prices of some imported goods go up, all else equal, that would leave less money for individuals to by other goods. The tariffs would have to be accompanied by the expansion of money and credit by the Fed and the banking system in order for widespread inflation.

i dont believe there is ever a case for gold. i completely follow Buffetts logic on this.

Agreed.

Buffet says that suppose you bought all the gold metal that exists in the world, and you cast it into a cube. It would be about 20 meters on a side.

What could you do with it? You could look at it. Fondle it. And not much of anything else, because gold doesn't do anything besides just sit there. It won't earn anything while it just sits there. It won't pay any dividends.

Same is true for physical dollars in your pocket. But they still have value for a reason. That same reason led to gold being valuable throughout last 1000 years, and same may hold true in future also.

There's always a case for gold. In fact, it should form the core of everyone's portfolio as a form of universal money -- just in case. 10% or so core holding in gold should be at the heart of any investor's assets.

Why not bitcoin? /sarcasm

And there is the bull case.

The "craziness" about money has been, for the cyber crowd, pulled into cryptocurrencies. They are "modern" and sexy and exciting and part of the glorious shiny internet future.

That leaves gold for "old folks" who watch "cable tv" (I know, that's actually the case; note also that one company (Sinclair) is coming to dominate the free-to-air affiliates of the old Big 3 networks - based on my relations, that's what gets watched).

We are in a period of heightened geopolitical risk. North Korea. Iran. The Baltics. The Balkans. Lots that could go very wrong very quickly.

And gold is in a kind of slump.

The contrarian in me wakes up at this point (but hasn't actually pushed the button).

Problem 4: If inflation is caused by tariffs rather than just being a function of monetary policy, golds ability to protect will be more limited. This isn't about the value of money changing as much as the cost of the products changing.

There is no reason to believe that tariffs cause overall inflation. If the prices of some imported goods go up, all else equal, that would leave less money for individuals to by other goods. The tariffs would have to be accompanied by the expansion of money and credit by the Fed and the banking system in order for widespread inflation.

Over that time period, a 55/35/10 stock/bond/gold portfolio outperformed a 60/40 portfolio by 55 basis points per year.

Exactly. Not only do modest allocations to gold boost portfolio performance in nominal times as you've said, they also offer disaster protection against the unthinkable.

Gold isn't some kind of religion or anything, it's just a tool. I don't get why people have such a problem with it. It's not like 10% is betting the farm on economic apocalypse. Gold could be a lifesaver at best, but even at its worst it has been a nice little stabilizer.

If you look at most emerging market countries, at some point in the past 40 years gold has been a life saver when viewed in their currency.

The US enjoys reserve currency status which is the main reason gold has under performed in US Dollars.

If you believe this will last forever, or that there will never be any monetary/fiscal management by the US government, then you don't need any gold.

Over that time period, a 55/35/10 stock/bond/gold portfolio outperformed a 60/40 portfolio by 55 basis points per year.

My guess is that this is massively sensitive to chosen start date - end point. Move it to 1980 when gold reached its all time peak, and it would not look so clever?

The case for outperformance for various assets is usually made that way by carefully picking your date range.

You have to make the case on a volatility basis to make the case for a hedge.

By that same token, why choose the worst start date?

The start date chosen in the article was nothing particularly special price-wise - from a quick glance at the historical price chart, in 1987 gold was around the middle of its trading range from 1980 to 2000.

But your point regarding gold’s sensitivity to start date in terms of CAGR is well noted, as I mentioned in a separate post above. It’s not like equities where the “world’s worst market timer” has still made a decent return over a moderate time horizon. With gold you have to exercise a bit more patience if you are banking on capital gains.

However, in terms of a black swan, SHTF hedge, I would argue that start date is less important. That type of hedge is not intended to bolster portfolio returns on average, but rather to help you sleep at night. The benefit to gold as a tail hedge is that, unlike other tail hedges, is has neutral to positive cost of carry on average. That is not an insignificant benefit, as option based tail hedges can generate substantial bleed.

Why gold rather than platinum or silver? The latter two have declined precipitously the past few years. Heck, platinum is cheaper than gold right now, I can't recall when that was the case before.

In the event, my opinion on gold is best explained by Buffet (short version):

“You could take all the gold that’s ever been mined, and it would fill a cube 68 feet in each direction. For what that’s worth at current gold prices, you could buy all—not some—of the farmland in the U.S. Plus, you could buy 16 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

Problem 4: If inflation is caused by tariffs rather than just being a function of monetary policy, golds ability to protect will be more limited. This isn't about the value of money changing as much as the cost of the products changing.

There is no reason to believe that tariffs cause overall inflation. If the prices of some imported goods go up, all else equal, that would leave less money for individuals to by other goods. The tariffs would have to be accompanied by the expansion of money and credit by the Fed and the banking system in order for widespread inflation.

First of all, you reference a report from economists at Wells Fargo Securities. I'm not sure if you've read any of their other reports in the past, but they are completely non-sensical. Only Keynesians and people who believe in cost-push inflation buy into this garbage. I cringe when I hear things such as "slack in the economy". Economics is not Physics. It is a soft science. Question: if the price of some goods goes up and these goods are considered essential, and assuming all else remains equal, what happens to the demand for other goods? That would be your answer as well for the price of the other goods. Whether this is caught in CPI or not is another question.

Why gold rather than platinum or silver? The latter two have declined precipitously the past few years. Heck, platinum is cheaper than gold right now, I can't recall when that was the case before.

Just listen to commercials on AM talk radio or watch commercials on Fox News and you'll understand why. Without getting political (maybe I already did with the previous statement), it has a history, and some people, especially those of particular political persuasions, are attracted to its history as a hedge against the perceived evils of fiat currencies. There are also investors who avoid 'sin' stocks, such as tobacco, energy companies not involved in clean energy production, etc. on another side of the political spectrum that have a similar strong emotional basis for their investments.

I wouldn't call either of these completely rational, but obviously there are lots of investments out there that people are attracted to with a strong emotional basis.

Problem 4: If inflation is caused by tariffs rather than just being a function of monetary policy, golds ability to protect will be more limited. This isn't about the value of money changing as much as the cost of the products changing.

There is no reason to believe that tariffs cause overall inflation. If the prices of some imported goods go up, all else equal, that would leave less money for individuals to by other goods. The tariffs would have to be accompanied by the expansion of money and credit by the Fed and the banking system in order for widespread inflation.

Actually it is the consensus, Jiu Jitsu Fighter's point. It's not a universal view though, and in a reasonable form monetarism ('inflation is always and everywhere a monetary phenomenon') allows for temporary variation in the inflation rate due to things other than monetary policy. IOW I doubt the writers of that Wells Fargo piece (who btw expect a minor short term effect of tariffs on inflation) would believe a move to generally higher tariffs would itself imply higher inflation for the next 10 yrs. Virtually everyone in economics recognizes that inflation in the long run is a matter of how much money exists and how fast it is circulating not tariffs, general tax policy, supply/demand for particular commodities, etc.

Or, things which correlate with loose monetary policy. Let's say politics in a hypothetical country, not necessarily the US it could be the historical example of say Argentina just as easily, became more populist and less 'consensus technocratic' over time. One theme might be protectionism as a way to promote economic growth and wealth creation, since that appeals to many or most people's seat-of-the-pants view of how trade works, though very few economists agree. Another popular concept might be holding off on nasty central bank rate increases which might hold back economic growth caused by debt fueled stimulus, and too much debt would also eventually become a reason for pressure on central bank to keep policy loose and govt's interest burden manageable. So you'd get more protectionism and more persistent inflation, but protectionism itself wouldn't be the cause of persistent inflation.

However, in terms of a black swan, SHTF hedge, I would argue that start date is less important. That type of hedge is not intended to bolster portfolio returns on average, but rather to help you sleep at night. The benefit to gold as a tail hedge is that, unlike other tail hedges, is has neutral to positive cost of carry on average. That is not an insignificant benefit, as option based tail hedges can generate substantial bleed.

Why gold rather than platinum or silver? The latter two have declined precipitously the past few years. Heck, platinum is cheaper than gold right now, I can't recall when that was the case before.

Just listen to commercials on AM talk radio or watch commercials on Fox News and you'll understand why. Without getting political (maybe I already did with the previous statement), it has a history, and some people, especially those of particular political persuasions, are attracted to its history as a hedge against the perceived evils of fiat currencies. There are also investors who avoid 'sin' stocks, such as tobacco, energy companies not involved in clean energy production, etc. on another side of the political spectrum that have a similar strong emotional basis for their investments.

I wouldn't call either of these completely rational, but obviously there are lots of investments out there that people are attracted to with a strong emotional basis.

How did these folks not learn their lesson last time around. How many lost their savings on gold coins and other scams.

Many people who react with derision towards investing in gold reference Warren Buffett's argument against holding the yellow metal. Usually paraphrasing his argument and asking "Would you rather own a cube of gold that just sits there, or seven Exxon Mobils, all the farmland in America, etc.?"

It should be noted that this is a logical fallacy. It's false equivalency and to some extent reductio ad absurdum.

I don't not know of any gold holder that thinks that a cube of gold is somehow better than holding 7 Exxon Mobils + a trillion dollars + farmland etc. Probably no gold investor has ever said that. Gold holders like myself simply argue that having a modicum of gold is a good diversifier to a traditional stock/bond portfolio during nominal times and is great disaster protection during the worst times. Gold has proven itself in this regard empirically. Period. Full stop. That's all that gold investors tend to say. That is a million miles away from saying that a cube of gold is better than all those productive assets -- that's just a viewpoint that some Bogleheads seem to project onto gold investors.

Many people who react with derision towards investing in gold reference Warren Buffett's argument against holding the yellow metal. Usually paraphrasing his argument and asking "Would you rather own a cube of gold that just sits there, or seven Exxon Mobils, all the farmland in America, etc.?"

It should be noted that this is a logical fallacy. It's false equivalency and to some extent reductio ad absurdum.

I don't not know of any gold holder that thinks that a cube of gold is somehow better than holding 7 Exxon Mobils + a trillion dollars + farmland etc. Probably no gold investor has ever said that. Gold holders like myself simply argue that having a modicum of gold is a good diversifier to a traditional stock/bond portfolio during nominal times and is great disaster protection during the worst times. Gold has proven itself in this regard empirically. Period. Full stop. That's all that gold investors tend to say. That is a million miles away from saying that a cube of gold is better than all those productive assets -- that's just a viewpoint that some Bogleheads seem to project onto gold investors.

Exactly.

1) A small gold allocation (say 10%) gooses up performance to a typical Boglehead style portfolio during nominal times

2) If SHTF it can be an economic lifesaver (and has proven to be throughout history)

3) The above two points combined means that there's basically no downside to holding a slice of gold in your portfolio. It's like having insurance where you pay a negative premium.

gold has risen over very long periods of time at the rate of inflation. An ounce of gold bought a fine tailored toga 2000 years ago and today it will buy you the equivalent fine tailored men's suit. It may hold value over time (keep pace with inflation) but I believe we invest to beat inflation over time. Here's a good measured, well reasoned take on gold returns by Ben Carlson:

I used to own gold to a few percent of my portfolio. Got rid of it a few years ago after reading Warren Buffett’s comments. Don’t miss it. But recently having urge to maybe get some back in portfolio as insurance. But after reading that it is heavily advertised on Fox channels to older customers of certain political persuasion have come to appreciate Warren’s comments. I am happy without. Good luck

Gold is non productive asset as is silver. They are insurance against calamity.
I keep $1K in silver half dollars in my safe as well as a similar amount of cash in 20 dollar notes.
That's as far as I will invest in precious metals.

gold has risen over very long periods of time at the rate of inflation. An ounce of gold bought a fine tailored toga 2000 years ago and today it will buy you the equivalent fine tailored men's suit.

When looking at the long term return of gold you also need to include the holding costs.

For example the GLD ETF has an expense ratio of 0.40%. Over 50 years that would reduce your holding by about 18%. If your ancient ancester started out with 1000 gold coins 2000 years ago you would only have a third of a gold coin left today after paying the expenses for 2000 years.

gold has risen over very long periods of time at the rate of inflation. An ounce of gold bought a fine tailored toga 2000 years ago and today it will buy you the equivalent fine tailored men's suit.

When looking at the long term return of gold you also need to include the holding costs.

For example the GLD ETF has an expense ratio of 0.40%. Over 50 years that would reduce your holding by about 18%. If your ancient ancester started out with 1000 gold coins 2000 years ago you would only have a third of a gold coin left today after paying the expenses for 2000 years.

gold has risen over very long periods of time at the rate of inflation. An ounce of gold bought a fine tailored toga 2000 years ago and today it will buy you the equivalent fine tailored men's suit.

When looking at the long term return of gold you also need to include the holding costs.

For example the GLD ETF has an expense ratio of 0.40%. Over 50 years that would reduce your holding by about 18%. If your ancient ancester started out with 1000 gold coins 2000 years ago you would only have a third of a gold coin left today after paying the expenses for 2000 years.

gold has risen over very long periods of time at the rate of inflation. An ounce of gold bought a fine tailored toga 2000 years ago and today it will buy you the equivalent fine tailored men's suit.

When looking at the long term return of gold you also need to include the holding costs.

For example the GLD ETF has an expense ratio of 0.40%. Over 50 years that would reduce your holding by about 18%. If your ancient ancester started out with 1000 gold coins 2000 years ago you would only have a third of a gold coin left today after paying the expenses for 2000 years.

Or you could just buy gold bullion and not pay any holding costs.

Well, you'd still need a tin can and a backyard to bury it in. Or at least a mattress to hide it under. So there might be a few holding costs.

As a naive investor, I have a question: how does gold work as a hedge against purposeful rapid debasement of the USD? The last time the government decided to debase the currency overnight, they just confiscated all of everyone's gold, paid them in USD, and went ahead debasing the currency. Holding gold, whether it was 10% of your assets or 100%, provided no benefit. What prevents this scenario from playing out again?

We owned Vanguard Gold Fund (now called Precious Metals & Mining) in 1993 when it zoomed +93%. It was Vanguard's BEST performing fund. Everyone was "jumping in."

In 1995 Gold was Vanguard's worst fund.
In 1996 Gold was Vanguard's fourth worst fund.
In 1997 Gold was Vanguard's worst fund. (-38.9%)
In 1998 Gold had the WORST 5 and 10 year return of ALL Vanguard funds.

gold has risen over very long periods of time at the rate of inflation. An ounce of gold bought a fine tailored toga 2000 years ago and today it will buy you the equivalent fine tailored men's suit.

When looking at the long term return of gold you also need to include the holding costs.

For example the GLD ETF has an expense ratio of 0.40%. Over 50 years that would reduce your holding by about 18%. If your ancient ancester started out with 1000 gold coins 2000 years ago you would only have a third of a gold coin left today after paying the expenses for 2000 years.

Or you could just buy gold bullion and not pay any holding costs.

Insurance, or if not insured the risk of losing the gold to theft or fire.

We owned Vanguard Gold Fund (now called Precious Metals & Mining) in 1993 when it zoomed +93%. It was Vanguard's BEST performing fund. Everyone was "jumping in."

In 1995 Gold was Vanguard's worst fund.
In 1996 Gold was Vanguard's fourth worst fund.
In 1997 Gold was Vanguard's worst fund. (-38.9%)
In 1998 Gold had the WORST 5 and 10 year return of ALL Vanguard funds.

Lesson learned: Sector funds are dangerous.

Best wishes.
Taylor

I didn't know Vanguard used to have a Gold fund. I thought it was just always a stock sector fund that bought gold mining companies. Yes, sector funds are dangerous but I'd consider that off-topic.

Please note those two should never be confused. A (bonafide) gold fund buys either the metal itself or gold futures (e.g. GLD(SPDR Gold Trust)). I personally use IAU(iShares Gold Trust). Commodities, including gold, are a completely different asset class from stocks, including the stock sector, precious metals equity.

Many people who react with derision towards investing in gold reference Warren Buffett's argument against holding the yellow metal. Usually paraphrasing his argument and asking "Would you rather own a cube of gold that just sits there, or seven Exxon Mobils, all the farmland in America, etc.?"

It should be noted that this is a logical fallacy. It's false equivalency and to some extent reductio ad absurdum.

I don't not know of any gold holder that thinks that a cube of gold is somehow better than holding 7 Exxon Mobils + a trillion dollars + farmland etc. Probably no gold investor has ever said that. Gold holders like myself simply argue that having a modicum of gold is a good diversifier to a traditional stock/bond portfolio during nominal times and is great disaster protection during the worst times. Gold has proven itself in this regard empirically. Period. Full stop. That's all that gold investors tend to say. That is a million miles away from saying that a cube of gold is better than all those productive assets -- that's just a viewpoint that some Bogleheads seem to project onto gold investors.

Exactly.

1) A small gold allocation (say 10%) gooses up performance to a typical Boglehead style portfolio during nominal times

2) If SHTF it can be an economic lifesaver (and has proven to be throughout history)

3) The above two points combined means that there's basically no downside to holding a slice of gold in your portfolio. It's like having insurance where you pay a negative premium.

I don't understand people's problem with it.

I don't either, but I don't mind being a contrarian. Following the crowd on any given issue in the investment world is usually a mistake. The prudent aren't prudent because they do what everyone else is doing -- quite the opposite.